Fed Reserves Hit 2023 Low, Sparking Debate on Optimal Level
The Federal Reserve's (Fed) bank reserves have hit a 2023 low, sparking debate among policymakers about the optimal reserve level. This comes amidst a 25 basis point interest rate cut and increased issuance of debt obligations by the Ministry of Finance.
The Fed's reserves stood at $2.98 trillion as of October 1, a $20.1 billion decrease from the week prior. This is the lowest level since the start of the year. The decline is linked to the Ministry of Finance's issuance of debt obligations to restore its cash balance following the summer debt ceiling increase.
Fed Governor Christopher Waller estimated the critical reserve level to be around $2.7 trillion in July. However, there's no consensus within the Fed on this lower bound. Federal Reserve Chairman Jerome Powell has stated that reserves remain excessive and should reach an adequate level in the future. Vice-Chair for Supervision Michelle Bowman insists on striving for the minimum possible balance, even if reserves approach deficit levels, although no specific person within the Fed holds this extreme view.
The Fed cited the slowdown in employment and economic growth in the first half of the year, along with persistent inflation, as reasons for the recent rate cut. The current dynamics are putting pressure on the Fed to complete its balance sheet reduction earlier than expected.
The Fed's reserves have decreased significantly, sparking a debate among policymakers about the optimal reserve level. The recent rate cut and increased issuance of debt obligations by the Ministry of Finance have contributed to this decline. The Fed is under pressure to adjust its balance sheet reduction plans in response to these developments.
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